Stocks to sell

SoFi Technologies Is Disruptive, But It’s Far From Dominant

SoFi Technologies (NASDAQ:SOFI) is aiming to upend the banking industry. The Silicon Valley startup initially focused on the student lending market. It has since branched out into a wide variety of other banking and brokerage products. SOFI stock went public earlier this year via a special purpose acquisition company (SPAC) and has been well-received by investors.

the Social Finance (SoFi stock) logo is displayed on a smartphone.

Source: rafapress /

SOFI stock continues to trade more than 50% above the initial $10 price of its SPAC. The shares have stayed above $15 despite the bloodbath that the SPAC sector has experienced in recent months.

Investors are drawn to the company’s easy-to-use app and the diversity of its financial products. Fintech companies like PayPal (NASDAQ:PYPL) and Square (NYSE:SQ) have rocketed in value over the past couple of years. SOFI stock could be next, but it’s far from a sure thing.

Jefferies Gives SoFi a Boost

On Wednesday, SOFI stock rallied sharply because Jefferies analyst John Hecht initiated coverage of the company with a favorable outlook. Hecht put a $25 price target on SOFI stock, suggesting that the shares can rise considerably above today’s level.

Hecht is bullish on SoFi because he thinks the company has “a flywheel of growth opportunity.” The flywheel is a concept taken from prominent business author Jim Collins, who described how great companies construct them. A flywheel is a heavy device that spins within a machine and gains more power and momentum as its speed increases.

Amazon (NASDAQ:AMZN) famously followed a flywheel approach. Bezos built more and more functions into the core Amazon experience, each one stacking seamlessly on top of the last. Amazon started by focusing only on books,  but ended up ruling internet e-commerce, thanks to a long series of gradual but relentless improvements.

SoFi is trying to use a similar approach. It started out with a strong student lending business. Borrowers have long been unhappy with the existing options in that area, and students are among the most tech-savvy demographics. So student loans were a great place for SoFi to start.

Now the company can try to sell many other services to its current customers.

SoFi is still in the early stages of its transition from specialty lender to all-in-one financial app. Regardless, its business outlook seems promising.

Sofi’s Valuation Is Excessive

SoFi’s revenue streams from its non-lending products are growing. But it still brings in more than three-quarters of its adjusted net revenue from traditional lending products, especially student loans, personal loans, and home loans. So it makes sense to compare SoFi’s valuation to that of other bank stocks.

SoFi currently has a market capitalization of $13.6 billion and expects to report around $1 billion of revenue. The company predicts that its 2021 EBITDA will be around $0. SoFi’s net income came in at -$468 million over the past 12 months.

Trading at a market capitalization of $11 billion, a significant discount to SoFi, is Western Alliance Bancorporation (NYSE:WAL). Western Alliance reported revenue of $1.4 billion last year and a solid net income of $746 million.

WAL stock trades at just 11 times its forward earnings and pays a dividend. The shares of Western Alliance, which has a much larger and highly profitable business than SoFi, seem much more appealing than those of the student lender.

Western Alliance’s compounded revenue growth has averaged about 19% annually over the past five years, while its earnings per share increases have averaged 20% annually over the same time period.

SoFi’s revenue is increasing more quickly than that of Wewstern Alliance. On the other hand, Western Alliance turns half of its revenues into net income.

That’s a stark contrast with SoFi, whose losses have mounted even as it rapidly grows its revenues.

The Verdict on SOFI Stock

There’s a simple question that determines the outlook of SoFi’s shares: Is the company in the tech sector or the banking space? SoFi markets itself as a neo-bank, and the majority of its services fit in that category.

Based on traditional banking metrics, SOFI stock is overvalued. Its shares trade at a considerable premium to its book value. That’s fine for normal banks that are highly profitable and generate a strong return on equity (ROE). SoFi, by contrast, is quite unprofitable. Normally, money-losing banks trade at a discount to their book values.

If we assume, on the other hand, that SoFi is a tech stock, its valuation looks much more reasonable. In fact, you could say that it’s even cheap compared to some of the other emerging fintech companies.

At the end of the day, however, banks’ profit margins are determined by the amount of lending they do and the interest rates that they earn on those transactions.

I’m skeptical about the notion that a neo-bank making student loans should have similar valuations as a hypergrowth cloud software or e-commerce business.

SOFI stock will find itself on much more solid footing once it becomes profitable. Until then, however, the investors who buy its shares are gambling.

On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

Ian Bezek has written more than 1,000 articles for and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.